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Congress has tucked into the annual defense authorization legislation provisions that increase significantly the federal contracts that must be reserved for U.S. small businesses and provide for future increases without the need for legislative action. This post examines those provisions and considers the ramifications for U.S. trading partners.

The House and Senate have passed a bipartisan National Defense Authorization Act (NDAA) for FY 2018. The NDAA sets the Pentagon’s spending at nearly $700 trillion and establishes policies that direct how the funds are to be spent. The NDAA also includes provisions that apply across the federal government. The President is expected to sign the legislation.

Two little-noticed provisions will expand the contracts that must be set aside for small businesses. One provision will increase the simplified acquisition threshold (SAT) from its current level of $150,000 to $250,000. The other directly ties that threshold to the level of mandatory small business set-asides, meaning that the set-asides will increase as the SAT goes up.

The Small Business Act of 1953 requires the federal government to set aside each year a certain amount of its procurement (with a current target of 23%) for U.S. small and minority businesses. The Act directs that all federal procurement contracts with “an anticipated value above $2,500 but not greater than $100,000” must be reserved exclusively for small business concerns. The only exception is where the contracting officer determines there is no reasonable expectation that two or more small businesses will make offers that are competitive in terms of market prices, quality and delivery of the goods or services being purchased.

Notwithstanding the $100,000 threshold in the Small Business Act, in practice, the threshold has been set administratively in the federal procurement rules at $150,000, the level of the current simplified acquisition threshold. The NDAA makes the $150,000 threshold mandatory and links future increases in the set-aside level to the SAT.

Under a provision, entitled “Uniformity in Procurement Terminology”, the NDAA amends the Small Business Act to permanently tie the small business set-aside threshold to the simplified acquisition threshold. This means that with any future increase in the SAT, the threshold for small-business set-asides will increase automatically. The White House in September expressed its support for the increase in the SAT, but made no mention of its implications for small business set-asides.

The increase in the threshold for small business set-asides will reduce the procurement opportunities available to U.S. trading partners under the WTO Government Procurement Agreement (GPA) and free trade agreements (FTAs). As a consequence, U.S. firms will be able to participate in foreign procurement at a lower monetary level than foreign firms will have effective access to U.S. procurement.

The current threshold for purchases of goods and services under the GPA is $191,000, and for many FTAs, it is much lower. For example, under the North American Free Trade Agreement (NAFTA), the U.S. gains access to Canada’s purchase of goods at $25,000. In the U.S.-Korea FTA, the federal procurement threshold was set at $100,000, which at the time the FTA was concluded was the threshold for small business set-asides.

While the expansion of mandatory set-asides may well draw criticism from U.S. trading partners, it will not violate any U.S. obligation under trade agreements because the United States takes a broad carve-out for them. It excludes any form of preference for small businesses. In the GPA, the U.S. defines a set-aside to include any form of preference, such as the exclusive right to provide a good or service or any price preference. The set-asides are not open to foreign firms.

With the NDAA provisions, the amount of procurement reserved for small businesses can increase without any debate. Congress has periodically proposed increases in the SAT. For example, in 2015, the House proposed, as part of that year’s NDAA, to increase the SAT to $500,000.